Earnings suffer a huge blow. The Group registered a top line of S$92.5m for 2Q09, down 8% YoY from S$100.0m, on the back of lower ASPs of steel products, and sluggish demand due to the economic downturn. NPAT for the quarter, as a consequence, was down 81% YoY to S$1.5m. This huge drop was mainly due to a S$5.7m provision made to mark certain categories of inventories to net realisable value in light of the steel price plunge during the quarter. Gross profit margin moderated slightly to 16.7%, 0.4ppt lower compared to a year ago.

Staff costs and other defensive efforts. Manpower expenses fell 20% YoY for 2Q09 to S$2.5m due to quick cost-cutting measures introduced in light of dire business conditions and lower personnel incentives. The Group’s inventory level also remained relatively flat for 2Q09. This reflects management’s efforts to scale back purchases and hold lower balances of inventory in anticipation of slower moving orders and any further potential drop in steel prices, in the midst of a sizeable slowdown in sales.

Changes to our estimates. We have cut sales volume assumptions from a growth of 15% to a fall of 7.5% for FY09. We have left our steel price sensitivity assumptions unchanged (-8%) across the same period as current average steel prices for FY09 are 5.9% lower than FY08. However, we have adjusted both average steel prices upward by 15% between FY09 to FY10 as we foresee a recovery in business activity and the steel industry during that period. These changes collectively have resulted in our revenue forecasts falling 19.6% from S$458.8 to S$369.1 in FY09 and 14.7% from S$504.7m to S$430.3 for FY10. EPS estimates have fallen 40.6% from 6.4S¢ to 3.8S¢ for FY09 and 16.4% from 6.7S¢ to 5.6S¢ for FY10.

Valuation and recommendation. Despite extremely challenging times, the Group has done reasonably well to still deliver a profit and generate positive operating cash inflow of S$6.2m. We upgrade HUPSteel from NEUTRAL to BUY despite a new lower target price of S$0.15 based on our retained target of 4x FY09 P/E (trough valuation multiple for the past five years).